The International Monetary Fund has published a departmental paper calling for a coordinated, multiyear program to reduce China’s official local government and local government financing vehicle debt, estimated at 90% of GDP at the end of 2025. Local government financing vehicle debt accounted for 51% of GDP. The paper finds that debt swaps, tighter oversight and refinancing measures have eased near-term servicing pressures but have not resolved the underlying overhang, which reflects persistent local government funding gaps, weak financing vehicle cash flows and the property downturn. The proposed strategy has three components. Fiscal reforms would strengthen local revenue capacity, transparency, central oversight and rules-based borrowing controls. Financial and fiscal frameworks would manage losses and protect public services through stronger bank resolution and crisis management arrangements, deeper distressed asset markets and conditional central government support for affected provinces. Once those safeguards are in place, enterprise insolvency procedures would restructure viable financing vehicles and unwind nonviable debt, imposing losses on creditors to preserve fiscal space and improve credit risk pricing. The central government would lead the sequencing, beginning with entity-level assessments, stronger reporting and financial safety net reforms before debt restructuring and local fiscal consolidation.
2026-09-25International Monetary Fund
International Monetary Fund outlines coordinated restructuring of China's local government debt overhang at 90% of GDP
An International Monetary Fund departmental paper calls for a coordinated restructuring of China’s local government debt, estimated at 90% of GDP at the end of 2025. It recommends fiscal reforms and stronger financial safety nets before using insolvency procedures to restructure viable financing vehicles and unwind nonviable debt. The central government would lead the process and provide conditional support to affected provinces.